The Finance Blogger


Debt and Consolidation

Debt and ConsolidationWhat is it about Debt and Consolidation that consumers do not understand? Every day almost I am reading something about this subject online and talking with people who do not see to understand that if you consolidate your debt you are going to make your life easier by only having to make one payment and it is going to be lower than the total of all of the other payments due to the lower cost if interest as well. The reason for this is simply because with a debt consolidation loan, your interest rate will be less especially if you are consolidating credit card debt.

Why is Credit Card Debt So Expensive

Credit card debt is usually charged at a rate of 18% approximately for cards such as Visa and Mastercard and as much as 27 or 28% for cards from department stores like Sears and others who have their own credit cards. With these rates, if you carry a balance over each month, you will be paying more interest than you are paying principle. This really means that you will take a very long time to pay off the debt if you are only paying the minimum payment each month. Most people just do not get this point and keep on paying and paying, wondering why they have no money left to do other things.

One of the reasons for this web site is that we are hoping to provide readers with information to help them manage their expenses better when it comes to dealing with credit card debt and other types of debt. The best way to illustrate and help people is to show an example.

Credit Card Debt and Consolidation

Let’s assume that a consumer has a credit card with a $5000 limit on it and he has run his card up to the limit so that now he owes $5000. He cannot repay the credit card and has decided to pay it off over 5 years time with monthly payments. The interest rate is 18% and he plans to not charge anything more to the card, which may be unrealistic, since most people will charge more to their card once they have a bit more room on it.

He also has another card, Mastercard that has $2000 on it with the same terms and interest rate. The payments for these two cards are:

Visa – $5000 at 18% = monthly payment=$119.79, and total interest payments = $2,287.07

Mastercard- $3000 at 18% = monthly payment=$71.87, and total interest payments = $1,372.24

Total Monthly Payments = $191.66 and total interest payments = $3659.31

Personal Loan for Debt and Consolidation

Personal loan rates vary a great deal depending on whether the loan is secured or not and the level of your credit rating. You can plug in whatever rate you would like, however we will use 9% and assume the same five year term for the personal loan. The results are quite interesting and really demonstrate why consumers should always consolidate credit card debt and use a personal loan to pay them off in total, if they are unable to pay this debt otherwise.

At 9%, the monthly payment declines to $161.58, a $30 savings per month and total interest paid is $1,829.66, which is almost half the interest payment. Now if you consolidated the loan, and put the $30 savings to the personal loan, this loan will be discharged even faster than the five years and the amount of interest paid would also be lower.

If this does not convince you to consolidate your debt, we are not sure what will.

Avoid Running Up Your Credit cards in the First Place

This is really the issue that we all face as consumers. We want to have everything now and we want to buy things when we really cannot afford it. Most consumers run into this problem of having too much debt and then have to dig themselves out of the debt. We try to follow the following motto, learned after many years of paying too much interest on too many things. Only purchase what you can afford to repay at the end of the month! Seems to work for us and now we have to do without a lot of things, but that is ok with us. Good luck on your debt and consolidation objectives.

 

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One Response to “Debt and Consolidation”

  1. we consolidated our credit cards and save hundreds of dollars in interest. We have a loan now to pay but it is really hard to not use the cards again

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